Will Energy-as-a-Service kill the kilowatt-hour?

by Roxanne Pieterse

This article was originally written for and published by Delta Energy & Environment. It has been modified for the purpose of this blog site and represents my own personal opinions unless otherwise stated.

As part of the work I do on the UK residential heating sector at Delta Energy & Environment, I recently attended the 2018 Heat and Decentralised Energy Conference. There were several exciting sessions on policy, technology, infrastructure and customers – reflecting a market that is starting to see a lot of change and disruption. Tim Rotheray, Director of the Association for Decentralised Energy, gave what I thought was an especially interesting talk on why he believes the time for Energy-as-a-Service (Eaas) has finally come.

Energy is traditionally sold to customers in units of kilowatt-hours (kWh) based on how much electricity or gas they use. Energy-as-a-Service business models, on the other hand, would provide an outcome rather than a commodity. For example, a heating service package might guarantee a customer’s home is maintained at 21°C for a fixed price, including the cost of the heating appliance, its maintenance costs and also any energy efficiency measures (which the service provider might install to reduce operating costs).

Whether Energy-as-a-Service will lead to the death of the kilowatt-hour, as Tim suggested, has been a topic of debate within Delta-ee. My colleagues and I agree that customer culture is certainly changing. The trend from product and commodity towards services and outcomes is emerging across multiple industries. Customers will pay for services outcomes (such as comfort or mobility) rather than products and commodities (such as fuel). Just look at car leasing, music streaming and even clothing rental.

Another reason I expect the industry will move away from kilowatt-hours is because the value in electricity markets will shift from kWh (energy) to kW (power) as the marginal cost of electricity production tumbles, but the challenges in matching generation and demand increase.

However, many customers will still want to buy products and fuel for those products rather than buy outcomes. For instance, research with our Customer Panel found that less than 17% of homeowners were likely to take up a ‘comfort tariff’. We think there needs to be a step change from today’s ownership mindset for mass-market adoption, though there are definitely segments that are receptive to EaaS. The Energy System’s Catapult has done some fascinating trials with households to understand how customers might actually engage with these business models in practice.

One of the main questions that comes up in discussions about EaaS is who customers will trust to use the right technology to deliver the required outcome. Some say it’s unlikely to be incumbent energy companies given the low levels of trust in many markets. But don’t rule it out – we’ve seen a subsidiary of an oil company get traction using heat pumps to deliver comfort to apartment blocks.

There are several examples of EaaS popping up in the lighting, heat and mobility sectors. They are still few and far between, and often in the embryonic stage. In the heating sector in particular, there are a number of companies moving towards using high-cost heat pumps to provide low-cost comfort for customers – a great example of heat-as-a-service. However, these business models are not easy to deliver. Recent research by Delta-ee’s ‘New Energy’ Business Model Service identified three core enablers in terms of company capabilities:

· An ability to accept and manage risk (e.g. negotiate appliance efficiency guarantees);

· Technical expertise and data analytics capabilities (e.g. modelling customer energy usage to deliver 21°C comfort); and

· Boots on the ground (e.g. a field force to install, operate, maintain and/or repair equipment).

Risk management is key. This is where the emergence of connected devices and low-cost sensors, together with sophisticated analytics will be critical to help companies tailor the right EaaS offerings to customers, and manage the risk involved in providing the outcome.

Service providers will obviously still need to measure the fuel they use to provide a service or outcome to their customers, so the kWh won’t “die” as such. But I believe it’s highly likely that kilowatt-hours could soon become “hidden” from the view of some customers. The challenge will be to develop business models that work for service providers and, most importantly, for customers. These will need to be fair, attractive, easy to understand and ultimately incentivise the right kind of energy-use behaviour from those customers.